Investment Comment December 2015

The Autumn Statement provided a major set-piece economic event in November. Despite being the third event of this kind this year (following both pre-election and post-election budgets) there were several relevant announcements for investors. Overall, the housing market benefited from the Chancellor’s announcement that the Government will facilitate the building of 400,000 new homes by 2020, with housebuilders finishing the day up several percent. However, the buy-to-let sector in particular was hit hard by the introduction of a 3% stamp duty surcharge on individuals purchasing a second property from April 2016. Coming after other measures in the July budget targeting buy-to-let landlords, this measure makes such a form of investing increasingly unattractive.

Elsewhere in the UK economy, the Bank of England released the results of its annual bank stress tests. None of the major banks were required to raise additional capital. Five banks passed the test outright whilst RBS and Standard Chartered were found to have insufficient capital but the BoE judged that the capital-raising exercises they were already undertaking were sufficient to cover their requirements.

Looking at company news, Melrose has announced a significant return of capital to shareholders. Following recent successes turning around other companies, Melrose is returning the profits and restructuring the company. In the healthcare sector, Astrazeneca has announced its intention to buy ZS Pharma, and Pfizer and Allergan have announced they intend to conclude a tax inversion deal. Less positively, VW continues to face the fallout from the discovery that it has been fitting a ‘defeat’ device into cars to rig emissions tests.

In Japan, the economy contracted in Q3, giving rise to a technical recession in the country. In China, the markets have remained stable compared to dramatic moves over the summer, but investor confidence has not yet recovered.

In Europe, inflation remained low at 0.9% for the year to November 2015. This was widely seen as clearing the way for the European Central Bank (ECB) to extend its QE programme by negating concerns from hawkish members that QE will cause runaway inflation. The extension of QE is likely to be positive for European stocks, as QE has historically supported asset prices.

Following the terrorist attacks in France, there were concerns that travel and leisure revenues would experience a drop, not only in France but across Europe. However, other than a drop in the days immediately following the attack a large drop in such revenues has not yet been reported.

The Federal Reserve in the US is likely to be under the spotlight during December as it considers once again whether to raise interest rates. Market expectations are pricing in an interest rate rise as being more likely than not but, despite the continued run of good employment data in the US (unemployment is now at just 5%), it is not certain that interest rates will be raised.

Cantab Asset Management continues to recommend a diversified portfolio. This offers the best protection from downside risk, whether in the form of interest rate rises reducing the value of bonds or the effects of terrorism on equities, whilst maintaining the opportunity for portfolio growth. There continue to be good opportunities for growth, particularly in developed economies where we continue to see strengthening consumer spending as incomes grow and inflation remains low.

Risk warnings
This document has been prepared based on our understanding of current UK law and HM Revenue and Customs practice, both of which may be the subject of change in the future. The opinions expressed herein are those of Cantab Asset Management Ltd and should not be construed as investment advice. Cantab Asset Management Ltd is authorised and regulated by the Financial Conduct Authority. As with all equity-based and bond-based investments, the value and the income therefrom can fall as well as rise and you may not get back all the money that you invested. The value of overseas securities will be influenced by the exchange rate used to convert these to sterling. Investments in stocks and shares should therefore be viewed as a medium to long-term investment. Past performance is not a guide to the future. It is important to note that in selecting ESG investments, a screening out process has taken place which eliminates many investments potentially providing good financial returns. By reducing the universe of possible investments, the investment performance of ESG portfolios might be less than that potentially produced by selecting from the larger unscreened universe.